Should The Saudis Fear The Permian’s Production Potential?

The Permian has increased its oil production more than any other shale basin in recent years, and it even had its production growing when all other U.S. shale plays were scaling back production during the downturn.

Drilling in the Permian in West Texas and eastern New Mexico has grown so much that the basin now has a spare production capacity second only to Saudi Arabia’s — capacity that Permian drillers could bring online in days.

Producers active in the Permian have at least 500,000 bpd of spare production capacity that could even be as much as 1 million bpd, Nansen Saleri, former head of reservoir management at Saudi Aramco and now CEO at Houston-based consultant Quantum Reservoir Impact, has told Bloomberg.

This estimate highlights the increased importance that U.S. shale — especially in the Permian — could play as a ‘swing producer’ on the global oil market.

“For decades there was one country and one company that had spare capacity and that country was Saudi Arabia and that company was Saudi Aramco,” Saleri told Bloomberg. “Now we are seeing an analog to that in the Permian,” he noted.

Saudi Arabia’s spare oil production capacity is estimated to be around 1.5 million bpd, according to data collected by Bloomberg.

According to Saleri, the Permian is capable of turning on the taps to respond to higher demand in three to four days, faster than any other field in the world — except for those operated by Saudi Aramco.

Like everyone else, the former manager at Aramco also expects the Permian oil production to grow substantially and reach at least 3 million bpd in a year, as less efficient drillers have left the game and only the most efficient drillers are staying.

“If operators believe that oil prices will stay above $60 for the coming six months they will go on a drilling program,” Saleri told Bloomberg.

EIA’s latest available Drilling Productivity Report shows that the Permian oil production will grow to 2.870 million bpd in February, up by 76,000 bpd from January, contributing the most to the production growth in the key U.S. shale areas.

In the February Short-Term Energy Outlook (STEO) published on Tuesday, the EIA estimates that U.S. crude oil production averaged 10.2 million bpd in January, up 100,000 bpd compared to December. Total U.S. crude oil production is now expected to average 10.6 million bpd in 2018, beating by 1 million bpd the previous annual production record set in 1970. Next year, U.S. crude oil production is seen averaging 11.2 million bpd.

The Permian is expected to be the main contributor to U.S. production growth in the next few years.

Since 2010, Permian production increases have averaged 14.8 percent per year, according to estimates by the Dallas Fed. The share of the Permian in total U.S. oil production has also significantly increased over the past five years, with the Permian Basin accounting for 26.9 percent of U.S. oil in October 2017, up from 18.1 percent in 2013. Related: The World’s Biggest Oil Benchmark Could Change Forever

This year, the International Energy Agency (IEA) expects “explosive growth” in the U.S., with America overtaking the world’s second-largest oil producer Saudi Arabia and rivaling the top oil producer Russia, provided that the OPEC/non-OPEC deal to curb production remains throughout 2018.

The Permian will undoubtedly play the leading role in the expected U.S. production growth, although the pace of that growth will depend on many factors, such as oil prices, capex plans, spending discipline, or cost curves. According to the former Saudi Aramco executive, the most prolific U.S. shale basin has large spare capacity — second only to Saudi Arabia’s. This makes the Permian potentially capable of playing the swing producer role on global oil markets.

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Every article about unlimited potential of shale oil avoids carefully the issue of its profitability. Reminds me of "huge potential of windmills to produce renewable electricity" - with not a word about how much lost on every kWh of that scheme. A maintenance of each wind mill costs more than electricity it produces - when and if it i snot broken.

John Brown on February 15 2018 said:

Well with Goldman Sachs forecasting $80 plus oil in 6 months why wouldn't the U.S. go into gold rush mode. Why let all that reserve capacity sit when you can make billions? Especially with OPEC/Russia so nicely idling more capacity to keep the price high so U.S. producers can realize a bonanza. The sweet spot for stable oil prices seemed to be with WTI between $50 to $55, but when it actually got there GREED ruled the day, even though there was still a glut of oil sloshing around, even though less than a year ago. High prices used to be bad for the USA, but with U.S. production up their are now a lot of benefits so let everyone talk oil prices up to $80 plus, and lets see the result. And its nice of Saudi Arabia, Russia, OPEC, others to let their oil sit in the ground so U.S. producers can grab a windfall. Thank you!